More deliveries drive big Boeing profit

CHICAGO -- Faster airplane production is going straight to the Boeing Co.'s bottom line.Third-quarter net income rose 12 percent as the company delivered planes to customers at a quicker pace. The world's largest planemaker has already speeded assembly of the 737 and 777 and on Wednesday announced plans to boost production of the 787 Dreamliner, too.The company's stock rose the most of any in the Dow Jones Industrial Average on Wednesday after the company's third-quarter results were announced. Boeing boosted its 2013 profit forecast and beat analysts' third-quarter estimates with the increase in jetliner deliveries.Full-year profit, excluding some pension expense, will be $6.50 to $6.65 a share, up from a range of $6.20 to $6.40, Boeing said. Earnings on that basis were $1.80 a share for the three months ended in September, topping the $1.52 average of 19 estimates compiled by Bloomberg.Revenue and free cash flow are surging as Boeing speeds the production tempo for single-aisle 737s, wide-body 777s and 787 Dreamliners, blunting the effect of a slowdown in military sales. The stock climbed about 5 percent Wednesday."We expected very strong results, and that's what they delivered," Peter Arment, a New York-based analyst for Sterne Agee & Leach Inc., said in a telephone interview.Monthly Dreamliner output will increase to 12 in 2016, up from a goal of 10 by the end of 2013, and reach 14 planes by decade's end, Boeing said. That will help clear a backlog of the 787-8 and -9 versions as Boeing prepares to add the stretched -10 Dreamliner by the latter part of the decade -- and contribute to cash flow as customers get faster deliveries.Wednesday's 5.3 percent share-price gain -- the closing price was $129 -- positioned Boeing to extend a year-to-date rally of 63 percent through Tuesday, almost three times the advance for the Standard & Poor's 500 Index. The stock is the top performer this year in the Dow average and led that benchmark gauge Wednesday as most of the 30 companies retreated.Sales riseRevenue rose 11 percent to $22.1 billion, exceeding the average $21.6 billion estimate of 19 analysts surveyed by Bloomberg. Commercial sales increased 15 percent to $14 billion, with deliveries up 14 percent to 170 aircraft, while defense grew 3 percent to $8.05 billion.Since January, Boeing has used a profit measure dubbed core earnings per share that it said gives a clearer picture by adjusting for market fluctuations in pension expense. Without the adjustment, net income rose to $1.16 billion, or $1.51 a share, compared with $1.03 billion, or $1.35 a year earlier.Boeing generated $2.32 billion in free cash flow during the quarter, almost doubling its year-earlier total. The company held $15.9 billion in cash and marketable securities as of the quarter's end, an 11 percent increase from its $14.3 billion balance in the previous three-month period.Commercial marginsThe planemaker boosted operating margins at the commercial airplane unit to 11.6 percent, from 9.5 percent a year earlier, even with a 92 percent jump in handovers of the Dreamliner, a jet thought to generate "zero or worse margins," Nick Cunningham, a London-based managing partner with Agency Partners, said in an Oct. 21 report.Sterne Agee's Arment credited the improved results to long-serving models such as the 777, which made its commercial debut in 1995 and whose development costs were worked off years ago. Boeing delivered 26 of the planes last quarter, a 30 percent increase from 20 a year earlier in 2012."When you're delivering this amount of aircraft from very mature programs such as 737 and 777, you're having tremendous efficiencies and cost absorption," Arment said. "That's allowing them to deliver very strong margins."Dreamliner accountingBoeing increased the accounting quantity for the 787 program by 200 units to 1,300 in anticipation of sales to be garnered by the 787-10 Dreamliner, which made its formal debut in June. The measure is used to estimate the profitability of an aircraft program.While the larger accounting block assigned to the 787 improved the program's gross margin, "we're still at very low single-digit" percentage for that figure, Chief Financial Officer Gregory Smith said during a conference call.The Dreamliner is the world's first all-composite airliner and was more than three years late entering commercial service, in 2011. The global 787 fleet was grounded for three months after meltdowns in the lithium-ion batteries of two planes in January.Boeing projected the Dreamliner's deferred production costs to peak at about $25 billion next year, an increase from a previous estimate of costs "slightly above" $20 billion. Smith said the higher costs reflected expenses to develop two new 787 variants and to retool the Boeing factories in Everett and South Carolina to build planes faster.Agency Partners' Cunningham said Dreamliner costs should fall as Boeing speeds the assembly pace, which is currently at about seven aircraft a month. He rates Boeing as a hold, while Arment recommends the shares as a buy.Defense lags commercialOperating margins for the defense unit declined to 8.4 percent from 10.5 percent a year earlier as military aircraft deliveries fell and Boeing announced in September that it would wind down production of its C-17 military transport aircraft.Sales at that business are stagnating as the U.S. budget cuts known as sequestration take hold and some of Boeing's military aircraft reach the end of their life cycles, Cunningham said.Boeing isn't looking at large acquisitions to bolster its defense business, although it is still pursuing smaller deals, Chief Executive Officer James McNerney said during Wednesday's conference call with analysts and reporters."Our future more lies in our ability to grow ourselves than anything else," McNerney said.787 still a challengeBoeing expects to deliver 635 to 645 passenger airplanes this year, including at least 60 787s.The company is still working to fix the reliability of the 787, McNerney said. The Dreamliner's "dispatch reliability" -- the plane's readiness for a flight -- is at 97 percent but needs to be better. "We're not pleased yet," he said.He said software issues including "false messaging" account for one-third of the problems with the 787's reliability. On Oct. 10, for example, a 787 headed to Tokyo returned to San Diego because of a possible problem with its deicing system. Japan Airlines officials said the pilot had received an error message about the system.False error messages are "frustrating for us and very frustrating for our customers," McNerney said.

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